In the last day or so the supermarket ombudsman reported the beleaguered supermarket chain knowingly delayed paying its suppliers to improve its financial position. This should be of no great surprise. We have known since September 2014 that Tesco had overstated its profits by 250 million GBP a figure that was subsequently increased to 320 odd million GBP. This latest report is just another chapter in this saga.
CEO, Dave Lewis, has done what reasonably would be expected and made another public apology about the situation. He has also made promises that policy overhaul is well underway. The full implications of these recent announcements are still emerging with talk of further punitive measures still under considerations from authorities and disgruntled investors alike.
This is not the biggest of Tesco’s problems. Not by a long way.
A new threat is emerging that could make the 30% plus share drop encountered in the last year and a bit to be a drop in the ocean. The new threat is not going to come from the traditional competition e.g. the Lidl and Aldi’s of this world which have grown so fast this last year or so. As impressive as their business performance gains have been, their business model is close enough to traditional to be at least competed against with innovation around the traditional supermarket model.
I would like you to consider a question.
What happens if a company emerges that means:
- You can buy any grocery or supermarket item of any quality and quantity.
- The customer trusts that quality delivered is consistently as stated (so I don’t need to physically see it)
- You ALWAYS can get your purchases cheaper than any other source
- You will get your groceries and purchases delivered within 1 hour
- The need for the traditional shop front and distribution approach disappears.
As of January 2016 no company can offer exactly this to their customers in the context of supermarket. But this proposition (or something close) will be with us pretty soon. The market leading proposition will not come from the traditional supermarkets no matter how well they manage their cost base, suppliers etc. There is one company who can do this and they already have the operating model proven. This company is already in the retail business, is dipping its toes into the grocery business and has already expressed an ambition to enter the supermarket business.
It’s so obvious actually when you think about it? They have so much of the model in place to do it – it is only a matter of time before they can really effectively do it and it is only time before a significant proportion of the current customer base will realise and trust they can get a quality/availability/price mix that is consistently better than anybody else out there.
As of 2016, none of the top 8 traditional players has the infrastructure to make this model work in the way Amazon can. Amazon has been working it for 20 years and they do this better than any other company that operates at scale, by some margin. The margin per item in supermarkets is now so small that any company that has traditional bricks and mortar shop fronts will have too high a cost base. Amazon has built a cost, choice and availability operating model plus scalability that will be very difficult to compete with.
Now, it is easy to say – nothing new here. Online food and grocery shopping already exists and the percentage of online shoppers is increasing. That is not my point. Today, online shopping pricing is roughly the same as physically going to the supermarket. The advantage is mainly convenience. The Amazon model will bring pricing down to below the cheapest for almost everything they sell, with availability up and delivery time down as a mix which none of the current players will be able to compete with. Tesco has expensive infrastructure to maintain and they do not have the operating model efficiency of an Amazon. That is the combination that will be tough to beat.
So is this the end for Tesco or at least the end of their reign as the leading supermarket chain?
In all honesty, if they keep on doing what they have been doing these last year’s then probably yes.
It all comes down to how Tesco CEO, Dave Lewis actually prepares for this sort of threat.
He has taken over a cost structure and operation that cannot be changed to one that can rival the Amazon machine as a combination of choice, availability, quality and cost, anytime soon.
He has only one option and it is the option that might take Supermarkets through incredible customer innovation and it will be really exciting for all of us.
If he does NOT take the opportunity, then the Amazon “ultimate operating machine” will win the day.
Mr Lewis has to harness the customer experience and harness it like no tomorrow. He has to find a way to make enough of the customer base to want to continue going into the store, even if they have to pay more. This is what is going to make the difference. Aldi and Lidl have already proved that cost effectivity works for an ambitious new entrant.
Tesco has to make the customer WANT to go to the store because the WOW factor is so great and the overall experience is so great customers would not want it any other way, even if the price/quality mix is below what can be reliably achieved. The traditional model will make supermarkets to close down stores in favour of a fewer number of hyper market style operations but that would be a cost play and I don’t see longevity.
I hope Mr Lewis, will appreciate that he can revolutionise the customer experience and that he can create a WOW factor and experience which would push the Amazon proposition into the lower income customer sector then he would make Tesco great again. It probably will not look like a traditional supermarket anymore but you could create a fantastic lifestyle management opportunity which actually is the business Tesco is actually in!
Who will help Mr Lewis? Actually it will be his own staff primarily. BUT and it’s a big BUT he has to get those staff to think differently. In 2016, that is not an impossible ask!
Come and learn more at CEW…
I have the pleasure of chairing CEW events this year, to which I look forward to meeting you as part of my role as Chair person, I will provide more insights to how you can get the best from your CE strategy.
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